we’ve turned the corner. - ericsson · pdf file05 per-arne sandströmfirst executive...

We’ve turned the corner.

S U M M A R Y A N N U A L R E P O R T 2 0 0 3

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01 Henry Sténson Senior Vice President, Group Function Communications02 Håkan Eriksson Senior Vice President and General Manager, Research and Development,and Chief Technology Officer03 Mats Granryd Vice President and General Manager, CDMA Systems04 Per Tjernberg Chief Information Officer and Senior Vice President, Group Function IS/IT and Sourcing05 Per-Arne Sandström First Executive Vice President and Deputy CEO06 Bert Nordberg Senior Vice President, Group Function Sales and Marketing07 Carl Olof Blomqvist Senior Vice President, Group Function Legal Affairs08 Hans Vestberg Vice President and General Manager, Business Unit Global Services09 Björn Olsson Vice President and General Manager, Business Unit Systems10 Torbjörn Nilsson Senior Vice President, Group Function Strategy and Product Management11 Karl-Henrik Sundström Executive Vice President and Chief Financial Officer12 Kurt Jofs Vice President and General Manager, Business Unit Access13 Marita Hellberg Senior Vice President, Group Function Human Resources and Organization14 Carl-Henric Svanberg CEO and President

Lots of exciting things start with a phone call. Such was the case when

I received a call in January , inviting me to become CEO of Ericsson.

This is an extraordinary company. I’ve always thought so, and

I believe it even more now. In my first year as CEO I’ve found that Ericsson

has exceptionally good people – dedicated, well-educated and thoroughly

responsible people – and their optimism has impressed me enormously.

I can tell you that the pioneering spirit that helped to lead the world’s

telecommunications revolution is still very much alive today.

Of course, times have been tough over the past few years and market

conditions remain tight. We’ve had to adapt accordingly, becoming much

more efficient, flexible and more responsive to our customers’ needs. So

when I joined, in April, one of my first actions was to build a management

team capable of guiding Ericsson through this period of transition and

taking us to the next level.

Last year’s annual report stated that was a year for clarity, decisiveness

and action. That was true then, it was true in , and it will remain true

in the year ahead. We know where we want to take the company, and we

are acting decisively to improve our efficiency, reduce our costs, grow our

revenues and increase our margins. These are our priorities.

In this letter I will describe the actions we have taken, and the opportunities

we see ahead in a market that has potential for growth. In particular,

I’ll discuss three fundamentally important points about Ericsson today:

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E R I C S S O N S U M M A R Y A N N U A L R E P O R T 2 0 0 3 A L E T T E R F R O M C A R L - H E N R I C S VA N B E R G

1. We kept our promise to return to profit page 2

3. We are strengthening our leadership position page 14

2. We have a clear strategy for continued margin improvement and sustainable growth page 8

We kept our promiseto return to profit

1.

Ericsson’s cost reduction programs were having positive effects before

I arrived. This challenging work was initiated by my predecessor, Kurt

Hellström, and led by Deputy CEO Per-Arne Sandström. In April,

we expanded and accelerated these programs to further reduce cost of sales

and operating expenses, creating a profitable cost basis, going forward.

Our commitment was rewarded when we returned to profit, before

restructuring charges, ahead of plan in the third quarter of 2003.

We ended the year achieving one of the strongest fourth quarter

performances in the industry.

We’ve achieved this thanks to the exceptional motivation and loyalty of all

of our employees. They understood that far reaching change was necessary,

and responded with incredible energy. The management team and I are

truly impressed by their dedication. We have reduced our workforce from

, to , employees in just three years. Of course, this meant that

many talented people had to leave us, but firm measures were required and

our decisive actions mean that Ericsson is now well positioned for the future.

Putting more of our time, energy and money behind our most valuable

products and services has paid off. We have concentrated our research and

development activities from development centers to , and reduced the

number of technology platforms we use. These measures, together with

effective management of working capital, have created a dramatic

improvement in cash flow. (1)

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3.4

Q1

5.7

Q2

5.8

Q3

10.7

Q4

(1) Adjusted operating cash flow(2003 SEK Billion)Improved cash position meansadded security and flexibility

F I N A N C I A L H I G H L I G H T S( T H R E E Y E A R S U M M A R Y )

Karl-Henrik Sundström Chief Financial Officer

“We’ve continued to strengthen our financial position, particularly in the important areasof cash flow, net debt and gross margin. Our successful stock issue in 2002 demonstratedthat shareholders have confidence in us. We’ve conserved most of the cash generatedby the issue – it’s there, ready for whenever we need it. It gives us good security incase we hit unexpected problems, and it allows us to invest when we identify theright opportunities.”

SEK million 2003 20024) 2001

Net sales 117,738 145,773 231,839Operating income –11,239 –21,299 –27,380Financial net –864 –1,536 –1,744Net income –10,844 –19,013 –21,264

Year-end positionTotal assets 182,372 209,113 257,521Net assets 62,780 76,076 72,240Working capital 58,873 73,026 104,998Capital employed 108,989 137,539 162,119Tangible assets 6,505 9,964 16,641Stockholders’ equity 60,481 73,607 68,587Minority interests 2,299 2,469 3,653Interest-bearing provisions and liabilities 46,209 61,463 89,879

Other informationEarnings per share, diluted, SEK2) 3) –0.69 –1.51 –1.94Cash dividends per share, SEK2) 0 1) 0 0Stockholders’ equity (SEK per share) 3.82 4.65 8.67Number of shares outstanding (in millions), at end of period 15,826 15,820 7,909Additions to tangible assets 3,493 2,738 8,726Depreciation on tangible assets 3,754 5,514 6,486

RatiosReturn on equity –16.2% –26.7% 26.5%Return on capital employed –5.9% –11.3% –14.3%Equity ratio 34.4% 36.4% 28.1%Capital turnover 1.0 1.0 1.5Inventory turnover 6.1 5.1 4.8Accounts receivable turnover 3.4 3.0 3.4Return on sales –6.2% –11.7% –9.7%Payment readiness 75,309 66,306 60,239

– as percentage of net sales 64.0% 45.5% 26.0%Net debt –26,998 –4,751 20,955

Statistical data, year-endOrders booked, net 113,000 128,351 221,477Number of employees 51,583 64,621 85,198

– of which in Sweden 24,408 30,421 37,328

1) For 2003, proposed by the Board of Directors.2) 2001 adjusted for stock dividend element of stock issue.3) Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share.4) 2002 restated for changed accounting principles. 2001 has not been restated as the information is not readily available.5) Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to new RR1.

4) 5)

We’re now well funded, with a net cash position of SEK billion. Our

focus on reducing capital employed has been far more successful than first

anticipated. As a result, we have conserved most of the proceeds from our

stock issue, giving us a much greater financial flexibility. I believe this

is an important strength, given the challenges and opportunities ahead.

While restructuring and cutting back, we also managed to reach our

operational goals. We have remained on schedule with the development

and rollout of new products and services. We have also strengthened our

leading position in mobile systems and successfully defended our market

shares. We continue to hold the largest market share (2) in both GSM

(2G) and WCDMA (3G), and in certain strategically important areas of

wireline technology.

I’m pleased to report that the Sony Ericsson joint venture also

transformed loss into profit in . Their increased focus on the GSM

and Japanese markets improved sales and streamlined costs. They attained

one of the highest average sales prices in the industry, demonstrating the

attractiveness of their advanced mobile phones.

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GSM, GPRS, EDGE

40%

1st

SOFTSWITCH/ MEDIA GATEWAY,

VOICE-OVER-PACKET

20%

1st

MMS

50%

WCDMA

40%

1st1st

(2) Market share and positionWe hold the leading position in the keyfixed and mobile systems markets

Sony Ericsson’s (3) success is good news for us as co-owner. Not only has

the company through hard work and cost adjustments returned to profit.

Sony Ericsson has also improved their product portfolio, and are aiming

for a leading position in high end products. Together we are creating

unique customer experiences by combining telecom technology, attractive

handsets and exciting content.

With telecommunication services becoming more sophisticated, and

systems more technically complex, there is a growing interdependency

between networks, applications, services and handsets. Together with

Sony Ericsson and through our licensing of handset technology (Ericsson

Mobile Platforms), we are involved in all four areas. This means we can

assure operators that their entire network will work effectively, all the

way from the consumer to the back office.

Ericsson has been on an arduous journey over the past few years and,

as promised, we have done what was needed to return to profit.

However, we are determinded to create an even more competitive

company by focusing on operational excellence with simplicity and

clarity in all that we do.

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T610 P900 SO505

(3) Sony Ericsson phonesSuccessful Sony Ericsson phones in 2003

W O R K I N G S M A R T E R

Per-Arne Sandström Deputy CEO

“We have reduced our annual operating expenses by over SEK 50 billion a year, and we’vealso made good progress on creating a much more efficient and flexible company. We’vereduced costs by employing fewer people and simplifying how we work. This has involvedrationalizing our product portfolio, negotiating better purchase agreements and improvingour supply chain. We’re looking for improvements everywhere, and our objective is tomaintain our leadership position while using fewer resources.”

We have a clear strategy for continued margin improvement and sustainable growth

2.

Our objective is to generate sustainable growth and provide competitive

returns to our investors regardless of day-to-day market developments.

Our cost-cutting enabled us to return to profit in , but

returning to profit is simply not enough. To ensure sustained profitability

and growth we set the goal high – to become world leaders

in efficiency and the way we operate as a company.

For example, as market leader in mobile systems we should be generating

more benefits from our economies of scale. We are a supplier to

of the world’s largest mobile operators.(4) These operators provide

services to some percent of all mobile subscribers. We’re developing new

ways to benefit from our scale by separating standardized, high-volume

products from more complex, customized products. This approach will

produce cost-savings across the entire sourcing, manufacturing and

installation chain.

We’re also working to get more from our common product platforms.

For example, our GSM/WCDMA and CDMA2000 products were once

entirely different from one another, but today they use the same software

and hardware in many areas of the core network and service layer. We’re

also developing access products, such as radio base stations, capable of

working with both CDMA2000 and WCDMA, the main 3G technologies.

In essence, the main difference between a CDMA2000 and a WCDMA

radio base station will be the software inside.

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(4 ) Five largest operatorsThe world’s five largest operators - all Ericsson customers (in alphabetical order).

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I’ve been greatly impressed with the technical innovations achieved by

Ericsson over the years. However, yesterday’s successes mean little if we’re

not able to offer the best solutions today, and tomorrow. R&D is an

extremely important part of our competitive advantage. About one-

third of our employees are engaged in this area, making it one of the

largest programs in the industry. We are now placing greater emphasis on

the commercialization of our innovations, and we have established a more

disciplined, customer-driven approach to our investments in R&D.

Along with improvements in operations and technology, we’ve analyzed

our sales processes and found ways to improve our performance. For

example, our regional market structure has been replaced by a simpler

approach, enabling us to close the gap between our sales and technology

functions. We involve operators more in our R&D process, and that’s

helping us to respond faster and to prioritize what we offer.

Looking at our market, we can confirm that it has stabilized and we are

starting to see signs of return to growth. Having said that, financial

stability remains a priority for many operators. We expect that the operator

emphasis on operational excellence is here to stay, as well as a strong focus

on financial returns.

Market conditions have not been easy and a number of operators are

grappling with the new services and business models made possible by 3G.

It’s imperative for operators, and for us as their business partner, to

understand what consumers want, what they are willing to pay and how to

adapt our business models accordingly. We must be as good at delivering

what consumers need as we are at developing technology.

C O M M O N P L AT F O R M

Håkan Eriksson Chief Technology Officer

“We have taken an important step towards making a common base station for the two main 3G technologies, WCDMA and CDMA2000. Sharing virtually everything from R&Dto tools, production, procurement and product introductions gives us a huge opportunityto reduce costs and increase economies of scale. We’re also continuing our provenstrategy of building products on a limited number of platforms. This ensures that ourcustomers have a smooth upgrade path for their networks. For example, our technologyfor switching provides unparalleled economy of scale because it can be adapted forany fixed or mobile network.”

Going forward, we believe that telecommunications will continue to be

a growth business. Only percent or so of the world’s population have

a mobile phone, and every day, about , consumers sign up for

mobile services.

I think it’s too simplistic to talk in terms of one market, however.

Operators in emerging markets make very different demands from those

in developed markets.

To meet the needs of customers in emerging markets, we have

launched the Ericsson Expander program, designed to lower the cost of

introducing mobile communications. Industry predictions show that

it is likely to reach the second billion mobile users within the

time frame, as services become more affordable. With more people

subscribing, and with existing subscribers making voice calls more often,

solutions for both coverage and capacity will be important opportunities

for us to address.

Of course, developed markets have higher mobile penetration, but mobile

calls still represent less than percent of total voice traffic in these

markets. Clearly, there is enormous potential for mobile operators to win a

larger share of voice traffic.

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Mobile multimediaA snapshot of Ericsson’s management team,taken by Carl-Henric using the timer function.

Mobile data services also represent a significant opportunity for operators.

The growth potential in this area is remarkable. More than one billion

text messages (5) are sent every day, and sales of camera phones have

surpassed those of traditional and digital cameras. In Japan and South Korea

some operators are already generating up to percent of their revenue

through data services such as text messages and pictures. This is a trend we

expect to see repeated in other parts of the world as mobile multimedia

services are introduced.

We see good prospects for growth within our markets. As operators feel more

secure financially, we expect them to invest more in capacity and new

services, in 2G as well as 3G.

Having said that, our objective is to ensure that we can prosper independent

of short-term fluctuations on the market. Our efforts in terms of efficiency,

flexibility and customer focus are moving us towards sustainable profitability

and growth.

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1999 2000 2001 2002

30

5

BILLIONS

(5) Number of SMS messages per monthContinued strong growth in mobiledata-based services like SMS

We are strengthening our leadership position

3.

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We are thoroughly convinced that people will use mobile devices more

and more for listening to music, taking pictures, and, for example, reading

e-mails while riding the bus to work. We will surf the web, buy products,

and get stock market reports, weather forecasts and news. We will check

maps to find the closest pharmacy, or a good meeting place. Delivering all

of these new types of services in a cost-efficient way demands increasingly

sophisticated networks. This is where Ericsson’s greatest competitive

strengths come into play.

For example, Ericsson has proven expertise in every one of the

dominant technology standards within both mobile and fixed

telecommunications. This is one of our true competitive strengths, and

one reason why the world’s largest operators choose to work with us.

Indeed, since I joined the company I have been very impressed by the

exceptionally long-term and very strong relationships we have with our

customers. They trust us with critical areas of their operations, and look to

us to guide them through the fast-changing and technically complicated

telecommunications environment.

Today’s solutions are dependent on many aspects of an operator’s total

business. Old systems must work with new, and with products from

other suppliers. So, skills such as network planning, systems integration

and solutions for network evolution are essential parts of what we provide.

Such services also enable us to further strengthen our relationships

with customers.

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We are are leading the introduction of layered architecture (6) into mobile

networks. This is all about building networks in a smarter way, and

making things simpler for the operator. Our approach structures a

network into independent functional areas of connectivity, control and

services, and keeps the core elements within the network independent of

one another. In this way, when the operator wants to introduce new

services or equipment into one layer it is not necessary to re-engineer the

entire network or completely replace the hardware. This gives the operator

much greater flexibility than conventional networks, which are designed

as a giant monolithic system, from top to bottom.

In the service layer, which functions like an open market place, we help

operators to catch revenues from a whole range of data services. We’re a

world-leading supplier within service layer solutions. For example, more

than percent of MMS subscribers are using our solutions when sending

and receiving multimedia messages. Our charging solutions enable more

than operators to charge for the services they deliver.

(6) The layered network architectureWe are building flexible and cost-efficientnetworks that make it easier for operators tohandle new services at lower cost

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Service Layer: User applications, Service networks and Gateways

Core network

Access

Torbjörn Nilsson Senior Vice President, Strategy and Product Management

“ Telecoms is a long-term growth industry, with operators achieving steady growth inrevenues and subscribers. Today about 20 percent of the world’s population uses a mobilephone, and only 1 percent are connected to broadband, so there’s great potential forgrowth. Operators are reducing debt and improving cash flow, and their focus has shiftedfrom market share to sustainable profitability. This means they have to develop newrevenue streams, as well as getting more out of their existing investments. We haveexpertise in vital parts of their business, and we can grow by being the mostresponsive business partner to the world’s leading operators.”

M A R K E T O V E R V I E W

2001 2003 2008

2000

1200

400

100

800

Mobile

Fixed(POTS/ISDN)

Fixed Broadband(Cable, xDSL, Ethernet)

WORLDWIDE SUBSCRIPTION GROWTH(NO. OF SUBSCRIPTIONS IN MILLIONS)

1983 2003

12001000

200

OPERATOR GROWTH CONTINUES(BUSD REVENUES)

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This position builds on our broad networking competence and range of

solutions, including our integration skills and specialist products developed

by us.We also support independent application developers and content

providers through our Mobility World centers. We select valuable new

innovations and transform them into working solutions for our

customers.

Greater technical complexity is increasing demand for our Global Services (7)

expertise. We have provided services such as designing, building, integrating,

optimizing and supporting networks for many years. This is becoming an

even more valuable part of our business. We are already one of the largest

suppliers of services to network operators, with more than one-quarter of

our people working in this area. These experts are operating in countries

around the world and support networks that provide telecommunications

for more than million subscribers worldwide.

During we expanded our managed services business with eight new

contracts, making us a market leader. Under these agreements, operators

outsource all or some of their network operations to us, enabling them to

reduce their operating expenses and devote greater time and resources to

establishing new services and attracting more customers.

20%

2001

26% 27%

2002 2003

(7) Global Services salesServices now account for 27 percentof our systems sales.

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So, what about 3G? What role will the next generation of mobile

technology play in our future? For me the business case is simple and

powerful – 3G is more cost-efficient and faster than 2G. The need for

more capacity at lower cost is evident, because operators must cope with

traffic growth and be able to expand their markets.

It also enables operators to offer new forms of higher value multimedia

services to subscribers. Ericsson works at the heart of the industry and we

see that 3G is gaining momentum. Indeed, it now accounts for more than

percent of our mobile systems sales.

3G is a major step forward in technology, but it is not a revolution.

GSM (2G) and WCDMA (3G) both use the same core network, so that

2G applications can work seamlessly with WCDMA technology. Similarly,

applications based on 3G versions of CDMA2000 can work with their

cdmaOne forerunners. This means that operators can test the market with

new services such as multimedia messaging without having to invest too

much or too soon in their radio network.

GSM is still developing, and our leading position has been strengthened,

not least by our contribution to the development of EDGE. As a 3G radio

technology, EDGE complements WCDMA and allows operators to

significantly enhance the data speeds and capacity of their existing GSM

networks with moderate investments.

H U M A N R E S O U R C E S

Marita Hellberg Senior Vice President, Human Resources and Organization

“2003 was an extremely demanding year for us, with significant reductions in headcountand many redundancies. However, the positive Ericsson spirit is still very much here.We’ve seen it in our employees, and in the local unions. We’ve maintained ourreputation and attractiveness as an employer, both in Sweden and around the world –according to independent surveys. This is a remarkable achievement given the toughtransformation we’ve had to implement. Our ambition is to maintain or even improvecurrent perceptions. We’ll do this by providing people with opportunities to work inchallenging jobs in a truly diverse and uniquely international company.”

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I’ve been talking about the sophistication of today’s services, technologies

and networks. Of course, it’s inevitable that the telecommunications

environment of the future will be even more complex. There is a simple

consumer-led reason for this. People are on the move more and more, yet

we always need to communicate with one another. As consumers, we like

to be connected in the best possible way, wherever we are. We don’t want

to worry about whether it’s technically possible, or whether our connection

is called 2G, 3G, wireless LAN, fixed wireless or whatever. So the natural

evolution of telecommunications is towards one seamless network,(8)

where we can all reach whoever we need, in whatever way we prefer.

The technology may be sophisticated and complex, but ease of use by

the consumer is essential for market success. Only services that are easy to

understand and simple to apply will be accepted and used. This requires

all of the various ways to connect to work together in a transparent way.

Consumers must be able to reach and to be reached, any place, any time,

quick and simple.

Local Area NetworkAccess to high capacity networks in locations such as airports and offices through WLAN/WiFi

Wide Area NetworkAccess to voice and data services using global mobile systems

Personal Area NetworkWireless connections between laptops, phones and pda's using bluetooth.

(8) Always best connectedWe are leading the way into the new world of user-focused networksby unifying personal, local and wide area mobile technology

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We’re developing mobile networks that can handle the enormous range

of traffic this demand generates. In addition to 3G and mobile networks,

fixed line multiservice networks also have an important role to play in

an increasingly integrated world. This creates attractive opportunities for

companies like Ericsson that can combine telephony and mobility with

IP/Ethernet technology to deliver powerful multiservice solutions.

One seamless global telecommunications service is a simple and

wonderful idea. It is also a major technical challenge, and one that suits

our strengths as a company.

Our comprehensive experience with all relevant technologies and our

commitment to develop open standards and initiatives such as layered

architecture, will enable us to be our customers’ best business partner.

We can help them to thrive. And if our customers thrive, so will we.

I would like to end my letter by acknowledging how important the

support of our shareholders has been in recent years. As I said earlier,

conditions have been tough, but we’re heading in the right direction.

I believe the efficient, robust and highly competitive Ericsson we are

building confirms the faith you’ve shown in us. I hope you share my

enthusiasm for our future.

Carl-Henric Svanberg President and Chief Executive Officer

S O M E O F O U R K E Y O F F E R I N G S

T H E S E R V I C E L AY E R

contains products and services that enable operatorsto provide, manage and charge for services beyondtraditional voice. Our solutions within the service layerinclude:

MMS (Multimedia Messaging Services) Enables usersto send and receive text messages, graphics, photos,audio and video using any handset.

Instant Talk A new voice service that enables quickgroup communication between users, even if they’rewith different operators.

Single Sign On Allows users to access serviceswithout having to enter their username and passwordevery time.

Automatic Device Configuration Configures ahandset automatically when a SIM card is inserted forthe first time, making it quicker and easier to useservices like MMS.

Content Delivery Solution Enables operators tomanage a user’s requests for multimedia content,from initial orders to billing, prepaid support andcontent development.

Charging Solutions Enable operators to developtheir content, data and voice businesses, providingservices such as convergent realtime charging forprepaid and postpaid users, mobile payments forservices on the open internet and mediation support.

K E Y P R O D U C T S , S E R V I C E S A N D T E C H N O L O G I E S

AXE A computer-controlled digitalswitching technology for large publictelephone switches — the most widelydeployed switching system in the world.

CDMA2000 A 3G technology for highcapacity digital wirelesscommunications, enabling users tobenefit from enhanced data rates forInternet, multimedia, video and otherapplications.

EDGE Enhanced Data for GlobalEvolution — a technology giving GSMsystems the capacity to handle 3Gservices.

ENGINE A set of packet-basedsolutions covering operator needs,from the modernization of telephonynetworks to the delivery of multimediaservices.

Ethernet The world’s most popularoffice networking technology,connecting computers and otherdevices to one another and to external networks.

GSM Global System for MobileCommunications — the world’s mostwidely used digital wireless technologyfor mobile services.

MMS Multimedia Messaging Services— a universally accepted standard forenabling mobile phone users to sendand receive messages with text,graphics, photos, audio and video.

WCDMA Wideband Code DivisionMultiple Access — a 3G technology forhigh capacity digital wirelesscommunications, enabling users tobenefit from enhanced data rates forInternet, multimedia, video and otherapplications.

Bluetooth A radio technology fortransmitting signals over shortdistances between phones, computersand other devices.

VoIP Voice over Internet Protocol, thetechnology for transmitting ordinaryvoice calls over the Internet usingpacket-linked routes. Also known as IPtelephony.

Softswitch A software-basedswitching platform that replacestraditional hardware-based switchingtechnology and bridges circuit-switched networks to IP networkscarrying voice, fax, data and videotraffic.

WLAN Wireless local area network —a radio technology using unlicensedfrequencies to access the Internet.Also known as WiFi.

Henry Sténson Senior Vice President, Group Function Communications

“We believe companies should act in a responsible way, maintaining high standards in corporategovernance and in employee and supplier conduct. Companies should also have a sustainableview in dealing with the environment and humanitarian aid. Ericsson has accepted the UNGlobal Compact’s nine principles for human rights. We see these principles as a prerequisitefor sound, long-term business. These are also guiding principles in our work and inspireus to find new ways to deploy our products and services in developing countries.”

C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y

SUSTAINABIL ITY AND ENVIRONMENT

We are committed to continually improving the environmentalperformance of our products, services and operations.In 2003 we:

• Applied the results from our unique 3G life cycle study to ourenvironmental goals, with more emphasis given to decreasing massand energy flows, without jeopardizing quality

• Took action to further reduce the energy consumption of ourproducts while in use

• Continued to phase out banned and restricted materials, includinglead in solder and brominated flame retardants

• Consolidated a worldwide Ecology Management recycling schemethrough which we take back and recycle our customers’ phased-outequipment

• In 2004 we will evaluate the impact of the EU directive onprevention of waste electrical and electronic equipment (WEEE).

CORPORATE GOVERNANCE

CODE OF CONDUCT

Our Code of Conduct regarding basic workers’ rights andworking conditions and environment protects the rights ofpeople working with our products and services, including thoseworking for our suppliers. We will discontinue, to the extentjustifiable, cooperation with any party that persists in non-compliance. The Code of Conduct includes directives on:

• Workers’ rights, including human rights and discrimination, wagesand working hours

• Safety, including workplace conditions

• Environment, with suppliers required to comply with environmentallaws and our environmental requirements

• Child labor, which we base on the child labor code in the UN Convention on the Rights of the Child, article 32.1

• Monitoring, with all suppliers obliged to inform us about theiroperations

A Code of Business Ethics and Conduct, which expresses our valuesand summarizes our rules for ethical behavior and other important rulesfor all directors, officers and employees, will be implemented in 2004.

Our internal rules for ethical behaviour and other important rules forall directors, officers and employees have long been established viaour group steering policies and directions.

ERICSSON RESPONSE PROGRAM

Ericsson Response is a global initiative aimed at responding tohuman suffering caused by disasters. Ericsson Response assistsdisaster relief operations by providing specialist volunteers andcommunications equipment. Key achievements in 2003:

• Set up a complete GSM communications system, providingemergency communication to aid relief work in Bam, Iran, followingthe major earthquake December 26. The network was up and runningwithin 24 hours after deployment

• Ericsson Response signed an agreement with the UN World FoodProgramme (WFP) for the use of our volunteers in WFP'shumanitarian operations worldwide

• Due to civil unrest in Liberia, hundreds of thousands of people fledtheir homes and were without access to adequate food supplies.Two volunteers helped the UN World Food Programme to re-establishIT and telecommunications systems in their looted offices in andaround Monrovia

• Ericsson Response worked with the UN World Food Programme atthe aid agency's Fast ICT Response team (FITTEST) base in Dubai,helping to prepare for the humanitarian operation in Iraq

• Assisted the Swedish Search and Rescue team and theInternational Federation of Red Cross and Red Crescent Societies(IFRC) by strengthening the network to support relief operationsoutside of Alger after the severe earthquake in May.

We have a long history of high standards in the governance,management and reporting of our activities. In recent years wehave established several bodies to strengthen governancewithin Ericsson, including:

• Audit Committee, which is appointed by the Board and overseesfinancial statements, audit processes and audit fees

• Finance Committee, which is appointed by the Board and overseesmajor financial transactions and our exposure to financial risk

• Remuneration Committee, which is appointed by the Board andoversees salary levels, retirement compensation and incentive plansfor employees

• Nomination Committee, which is appointed by the shareholders atthe AGM and is responsible for nominating board directors andproposing directors’ fees

• Disclosure Committee, which is appointed by the CEO and CFOand assists them in fulfilling the company’s disclosure controls andprocedures

See our website www.ericsson.com/sustainability for more information, including economic, social and environmental aspects ofour strategy and business activities (Information on our website does not form part of this document).

E R I C S S O N S U M M A R Y A N N U A L R E P O R T 2 0 0 3 B O A R D O F D I R E C T O R S ’ R E P O R T

25

BOARD OF DIRECTORS’ REPORT

As reported Adjustments Adjusted

2003 2002 1) 2001 1) 2003 2002 2001 2003 2002 2001

Net sales 117,738 145,773 231,839 – – – 117,738 145,773 231,839Gross margin 38,837 41,549 57,939 4,790 5,589 8,345 43,627 47,138 66,284

– percent 33% 29% 25% – – – 37% 32% 29%

Total operating expenses –51,013 –62,401 –93,002 9,392 3,092 6,655 –41,621 –59,309 –86,347– percent 43% 43% 40% – – – 35% 41% 37%

Share in earnings of JV and associated companies –604 –1,220 –715 352 –230 – –252 –1,450 –715Other operating revenues and costs 1,541 773 8,398 358 353 –5,800 1,899 1,126 2,598Operating income –11,239 –21,299 –27,380 14,892 8,804 9,200 3,653 –12,495 –18,180

– percent –10% –15% –12% – – – 3% –9% –8%

Income after financial items –12,103 –22,835 –29,154 14,892 8,804 9,200 2,789 –14,031 –19,954

Items affecting comparabilityNon-operational capital gains/losses, net (in other operating revenues and costs) 13 42 –5,800Capitalization of development expenses, net (in other operating expenses) –1,584 –3,200 –Restructuring costs, net, 16,463 11,962 15,000

Total 14,892 8,804 9,200

Restructuring costs, of which in:– Cost of sales 4,790 5,589 8,345– Operating expenses 10,976 6,292 6,655– Other operating revenues and costs 345 311 –– Share in earnings of JV and associated

companies/Phones 352 –230 –

Total 16,463 11,962 15,000

1) Restated for changes in accounting principles.

In the following comments we will refer to measures such as: “adjusted

gross margin”, “adjusted operating expenses”, “adjusted operating

income”, and “adjusted income after financial items”. The adjustments

are related to restructuring costs, effects of capitalization of development

costs and non-operation capital gains, and, in our opinion, the adjusted

measures better reflect the operations and will help the readers to

understand the Company’s performance during the periods reported in

the statements. In the period 2001–2003, Ericsson carried out two

major restructuring programs: in the Phones segment in 2001, to stop

huge operating losses and to prepare for establishing a joint venture with

Sony, and in Systems and Other Operations during 2001–2003 to

adapt to the changing market. Due to the conditions in the telecom

market during the last three years, as described below in “Market

environment and Trend Information”, we were forced to undertake

these extensive restructuring efforts, with costs so significant in relation

to the underlying business that a clear separation is necessary for the

understanding of our financial statements. To illustrate the magnitude of

change, the number of employees was reduced from 107,000 to52,000. The restructuring programs were substantially completed by

the end of . In 2001, we also incurred significant capital gains of a

non-recurring nature, and income in 2002 and 2003 was favourably

affected by initial effects of implementation of a new Swedish

accounting standard regarding intangible assets. However, in order not

to mislead readers, we do publish both unadjusted and adjusted

measures.

The following text contains “Forward Looking Statements” – please

see “Forward Looking Statements” on page 1. Numbers in brackets refer

to the prior year.


Highlights of 2003:

• Return to profit before restructuring costs with a positive adjusted

income after financial items for the full year

• Positive cash flow

• Cost reductions delivered, focus now on operational efficiency, and

• Market position strengthened.

STRATEGY AND GOALS

Ericsson is a leading provider of infrastructure equipment for mobile

and fixed networks and related products and services, as well as products

for special applications, such as radar, cables and mobile handset

platform technology. Our goal is to be the preferred business partner to

the leading network operators as well as to customers in certain

specialized markets such as microwave systems. In doing so, we strive to

be the market and technology leader. We offer end-to-end solutions for

operators, related to their infrastructure investments, network

management and service offerings. Our products and services fit into the

core and access parts of networks as well as into the increasingly

important service layer. In addition, with our mobile platform products

and through our Sony Ericsson joint venture for handsets, we extend the

scope of our operations all the way to the consumer.

As a market leader, our strategy is to leverage our economies of scale

to be able to develop superior products and services, offering our

customers competitive advantages.

During recent years, we have adopted measures to cut costs and adapt

Ericsson to the new market situation. We can now conclude that our

actions have had the intended effects so far. Despite these rapid internal

changes, we have been able to keep up deliveries and support towards our

customers, including the roll out of advanced G technology, and we have

carried out our most important development projects without significant

delays.

The improved financial position is partially a result of the successful stock

issue in , which ensured that we would have resources to finance our

operations during the phase of market decline and restructuring. This has

enabled management to focus on the business and on the restructuring. The

important result of this is that Ericsson has delivered on the promises to

return to profit sometime in , excluding restructuring costs, and to do

this with a positive cash flow before financing activities. As indicated when

we made the rights issue in , certain maturing debts have been repaid,

but the Company has not consumed any of the cash generated by the stock

issue for operational purposes. It is still part of the very strong payment

readiness.

Focus is now on operational improvement to become even more

effective. The target is now to reach a sustainable and competitive

profitability.

MARKET ENVIRONMENT AND TREND INFORMATION

The market for mobile and fixed infrastructure went through a number

of significant changes during the last five years. From the mid ’s

until , network operators invested heavily in mobile infrastructure

driven by strong subscriber growth and increasing usage. Similarly, fixed

networks were expanded to accommodate Internet traffic. This

extraordinary growth peaked in , and, since the beginning of ,

the market for network equipment has contracted sharply.

The three years of decline can be characterized by:

• Auctions of G licenses, which led to spending by operators of the

equivalent of seven years’ worth of infrastructure investments on the

licenses. This created an investment pause in network equipment for

G, in particular in many markets in Western Europe

• Significant network capacity was deployed during the boom years and

many operators reduced their capital expenditures to adjust for excess

capacity

• Due to over-investments in the sector, credit market restrictions for

telecom operators and vendors caused a series of downgrades in credit

ratings. Many operators prioritized cash flow over top-line growth

and further limited their investments to focus on improved balance

sheets to maintain their credit rating.

• The resulting rapid and dramatic decline in demand forced

equipment suppliers to reduce costs and adjust to the much lower

demand

• Macroeconomic difficulties in certain markets, for example Latin

America, put further pressure on the decline in equipment demand,

and

• Technology changes dramatically altered the market, including such

changes as:

– The early implementation of G technology in Japan, which caused

a sharp reduction in PDC investments.

– System transition in the United States and Latin America from

TDMA to GSM or CDMA to prepare for evolution to G-based

networks. This led to significant reduction in our TDMA sales, but

also increased GSM sales.

– Increased demand for CDMA equipment. Ericsson addressed this

market segment, focusing on new CDMA markets such as China and

India.

– Build out of G networks, but in most cases just according to basic

license requirements. So far the limited supply of handsets has

restricted commercial launches.

– More complex networks, with additional features and a larger mix

of equipment and software from multiple vendors, which is

opening up possibilities for Ericsson to market professional services

to support integration of such networks. Operators are also

becoming more willing to outsource network management and

focus on their service offerings to their customer base in the new

technology environment.

– In fixed networks, operators are converting from circuit-switched to

packet-switched networks – reflecting the need to more efficiently

handle voice and data traffic. This caused a very sharp reduction in

demand for our circuit-switching products.

Due to the sales decline, adjusted income after financial items dropped

sharply during and , with a recovery during . Headcount

was reduced by slightly more than percent over these years.

26


During the last three years, we have been able to strengthen our leading

market position in the mobile systems market. We have also established

a leading position in the fixed infrastructure market for our packet-

switched network solutions. Although the operators drastically reduced

their investments in the last few years, the underlying subscriber and

traffic growth continued. We are firmly convinced that our industry is a

growth industry, but we believe the growth in the late ’s and

was extraordinary and will not likely be repeated.

While we do not yet see any solid evidence of a fast pick up in

operator investments, we are seeing signs of a gradual return to growth.

Operators are starting to address their operating expenses and seeking

revenue growth from new services. Through increased activities in

professional services and service layer applications, we aim for increased

sales in these fast-growing segments. We are already a market leader

within systems integration and managed services, and we have

established a strong position within the service layer.

Orders booked of SEK . billion were percent lower than last

year, of which approximately percentage points is due to negative

foreign exchange impact, largely due to a weaker USD.

Orders by market in Systems and Other Operations

(SEK billion) 2003 2002 Change 2001 Change

Europe, Middle East & Africa (EMEA) 54.2 65.4 –17% 92.7 –29%North America 20.2 22.9 –12% 24.6 –7%Latin America 9.1 9.6 –5% 31.1 –69%Asia Pacific 29.5 30.5 –3% 53.4 –43%

Total 113.0 128.4 –12% 201.8 –36%

Ericsson’s two largest markets, the United States and China, were also

among the best performing markets, with an increase in China of

percent, despite a negative currency effect, and a percent decline in

the US, which was almost entirely currency related. During the last two

years, operators in the United States have invested in GSM networks to

prepare for next generation’s IP-based technology. This has benefited

Ericsson as the largest GSM-vendor. Improved order development in

China followed a weak year . Ericsson is the largest GSM vendor in

China, and China is Ericsson’s largest CDMA market. We look forward to

late /early , when it is expected that system choices will be

made with regard to G technologies, which will clarify the market

situation and support new investment programs. Among the other

markets in Asia Pacific, India, Sri Lanka, Taiwan and Australia also

developed well, whereas Japan declined substantially. In EMEA, the

decline is primarily attributable to low orders in Saudi Arabia compared

to a very large order intake in , as well as low orders in Sweden and

other countries where G build out for initial coverage is currently

ongoing and additional capacity orders have not yet started to come.

Segment orders in Systems and Other Operations


Systems 105.4 115.3 –9% 183.3 –37%Mobile 79.5 85.5 –7% 143.1 –40%Fixed 6.3 9.3 –32% 21.8 –57%Professional Services 19.6 20.5 –4% 18.4 11%

Other Operations 9.2 15.4 –40% 27.4 –44%Less: inter segment orders –1.6 –2.4 – –8.9 –

Total 113.0 128.4 –12% 201.8 –36%

Book-to-bill ratios were above one for each of the first three quarters in

. Due to the strong sales in the fourth quarter, the ratio fell below one,

despite somewhat higher order bookings than in previous quarters. The

order backlog corresponds to – months of sales, which we consider to be

a normal level. For managed service contracts longer than one year, only

the amounts related to the next twelve months are booked.

Within Mobile Networks, orders for GSM declined percent, while

increases in G (WCDMA) and CDMA offset sharp declines for PDC and

TDMA. The combined GSM/WCDMA track declined only percent. It was

also encouraging that Ericsson in its CDMA business received additional

orders in China, the United States and Nigeria and in several new

markets, including India, Ecuador and Kazakhstan.

Ericsson won a number of orders for broadband access and switching

products, but this was not sufficient to offset the decline for circuit-

switching equipment.

Professional services continued to develop well. Adjusting for foreign

exchange effects, orders increased slightly year over year. A number of

new customers signed managed services contracts and we now have

such customers.

The decline in Other Operations of percent is partly attributable

to the fourth quarter divestiture of our Microelectronics operations

and deconsolidation of handset production in China for Sony Ericsson.

Orders for comparable units declined percent, mainly due to low

orders in the Microwave and Mobile Platform businesses.

PRODUCTS, RESEARCH AND DEVELOPMENT

Notwithstanding the general industry conditions, Ericsson continued

over the last three years to invest heavily in R&D to support our

competitive position. The spending in relation to sales has been stable.

The reductions in absolute amounts have been achieved through

focusing on a narrower core product portfolio and through increased

efficiency as an effect of restructuring efforts and have not had a major

negative impact on the key R&D programs.

R&D expenditures excludingrestructuring costs and capitalization 2003 2002 2001

R&D SEK billion 23.2 29.3 43.1As percent of sales 20% 20% 19%Number of R&D sites 25 30 70Employees in R&D 16,500 20,500 25,200

27

0

50

100

150

200

250

300 Systems and Other Operations

Phones

Net sales 1999–2003

1999 2000 2001 2002 2003


Our product portfolio was strengthened during the year with

competitive solutions and more cost-effective products for a number of

applications. Some of the major developments were:

• Industrialized versions of volume products in G

• Roll out of G in commercial networks

• Platform commonality for CDMA and WCDMA products to achieve

volume leverage on cost and strengthen our market position in CDMA

• First commercially launched EDGE network

• Expander, a G solution for economic mobile network solutions in

emerging markets

• Mass deployment of MMS solutions – also an important

demonstration of our strong capabilities in systems integration, which

is a large part of MMS contracts

• Implementation of solutions for WLAN integration in mobile networks

• Softswitch products for IP and multi-media in fixed networks

• New generation of Ethernet-based broadband access products, and

• Ericsson Mobile Platforms’ handset technology for WCDMA, was

chosen by of the top largest suppliers of handsets

PARTNERSHIPS AND JOINT VENTURES,

ACQUISITIONS/DIVESTITURES

During , the joint venture Sony Ericsson Mobile Communications

successfully launched a number of new handsets. This enabled Sony

Ericsson to return to profit during the second half of the year. A number

of cost reduction actions were implemented and are expected to

contribute to sustainable positive results. Mobile communications

networks are becoming increasingly complex, and many new types of

services will be launched. Since handsets are an important part of the

realization of the new services, it is beneficial for Ericsson as a systems

vendor and a supplier of handset platform technology to participate

closely also in this area of the end-to-end solution through the joint

venture.

In the first quarter of , Sony and Ericsson made an additional

capital contribution of EUR million each to the joint venture. We

believe that the joint venture is now self-sustaining and there are

currently no plans for additional capital investments by the parent

companies.

In January , Ericsson sold its optoelectronics operations to

Northlight Optronics AB.

During the year, in-house activities within IS/IT were outsourced to

Hewlett-Packard (HP) and IBM, and five-year service agreements were

signed, which will substantially reduce the operating costs for these

activities. HP will provide services to Ericsson in more than

countries, including data center management, help desk support and

desktop environment services. The agreement involves transfer of assets

and around , employees to HP. IBM will provide development,

implementation and maintenance services of internal applications. The

agreement involves transfer of , employees to IBM.

No other significant acquisitions or divestments were made during

.

Please see also the section Information on the Company – Joint

Ventures, Cooperation Arrangements and Venture Capital.

RESTRUCTURING PROGRAM

The restructuring program initiated in was completed ahead of

schedule and delivered the targeted cost reductions. Gross margin and

operating expense run-rate targets were surpassed for the year. The

number of employees at year-end was ,, which is in line with our

plan of ,. In the first quarter the cost reduction program was

further expanded to include additional measures, aiming to reduce

operating expenses beyond the originally planned level of SEK billion

per year down to SEK billion by the third quarter , and to reduce

Cost of Sales by SEK billion on an annual basis. The number of

employees is expected to reach , during . The expansion of

the program was made to secure not only to reach a break-even result,

but to deliver a competitive return on investment to the shareholders.

Total restructuring charges during the year were SEK . (.) billion.

Included are SEK . billion of restructuring costs in Sony Ericsson. Cash

flow in related to restructuring was SEK –. (–.) billion. For

more detailed information on restructuring charges, please see Notes to

the Financial Statements – Note , Profit from Operations.

FINANCIAL RESULTS

Sales and Gross Margin

Sales in Systems and Other Operations


Systems 108.7 132.0 –18% 188.7 –30%Mobile 82.1 101.1 –19% 143.8 –30%Fixed 8.0 11.7 –32% 27.1 –57%Professional Services 18.6 19.2 –3% 17.8 8%

Other Operations 10.6 16.2 –35% 31.8 –49%Less: inter segment sales –1.6 –2.4 – –9.7 –

Total 117.7 145.8 –19% 210.8 –31%

In , we established the Sony Ericsson joint venture for handsets.

Their operations are included in our segment Phones, accounted for

under the equity method with no sales included in Ericsson’s financial

statements.

With strong sales in Systems and Other Operations in the fourth

quarter, at the same level as the fourth quarter last year, the full year

decline in sales stopped at percent. Approximately percentage

points of the decline are attributable to foreign exchange effects. The

decline in sales was widespread across almost all markets. Sales in the

United States declined percent due to lower TDMA volumes. China

sales were flat year over year for comparable units, excluding the sales of

handsets to Sony Ericsson last year. Price pressure remained strong, in

particular regarding contracts with customers aquiring for them new

technology.

Sales of mobile systems decreased percent compared to .

Sharply reduced sales of the mature TDMA/PDC systems contributed to

almost half of the decline and lower GSM sales the other half. The roll

out of G systems continued at a moderate rate, as the availability of

handsets was still rather limited. Sales of G (WCDMA) systems increased

by percent from to SEK . billion or to () percent of Mobile

Network sales. We expect a pick up in roll out activities during .

28


Sales increased of products related to the service layer, which is

becoming of increased importance in the networks based on new

technology offering data and picture and similar services.

Fixed Network sales declined substantially due to a very weak market

demand for circuit-switching.

Sales of professional services decreased by percent from last year and

now account for () percent of Systems sales. Adjusted for foreign

exchange effects sales increased approximately percent.

Sales in Other Operations declined by percent or SEK . billion, of

which SEK . billion are related to the now deconsolidated handset

production in China and the Microelectronics component business

divested in . The remaining reduction of percent is largely

attributable to the Mobile Platforms and Enterprise businesses. Mobile

platform revenues are dependent on G handset or component

production volumes by our licensed customers and production for G

handsets has not yet picked up.

The adjusted gross margin, which declined sharply from percent in

year to percent in and percent in due to excess

capacity costs and price competition, improved to percent due to

capacity adjustments and other restructuring efforts, continued

outsourcing and effects of design cost reductions of products. Adjusted

gross margin improved gradually during the year and in particular in the

last quarter, reaching percent due to leverage of a strong sales volume.

This is well in line with our target.

Operating expenses

Operating expenses excluding restructuring costs were reduced by

almost percent, and as a percentage of sales from percent to

percent. Annualized run-rate in the fourth quarter was SEK billion,

which is better than the targeted run-rate of SEK billion and clearly on

track to reach next year’s target level of SEK billion. The net effect of

risk provisions and credit losses for customer financing affecting

operating expenses amounted to SEK . (.) billion, see Notes to the

Financial Statements – Note , Financial Instruments.

Other Income Statement items

Adjusted share in earnings of JV & associated companies improved by

SEK . billion due to an improved performance by Sony Ericsson going

from a result of SEK –. billion last year to SEK –. billion this year,

excluding restructuring costs. Sony Ericsson successfully launched a

number of new handsets. This and certain restructuring measures taken

enabled Sony Ericsson to show a profit for the second half of ,

before restructuring costs. Sony Ericsson sold million handsets, with

a product mix geared towards more high-end models with high

functionality, many with camera and color screen. The overall market

share is approximately percent, and the market share in the served

market segments is higher.

Other operating revenues increased from SEK . billion to SEK .

billion, mainly as a result of increased focus on generating more license

fees from intellectual property rights.

Financial net improved from SEK –. billion in to SEK –.

billion due to the improved cash position following last year’s rights

issue, repayment of debt and this year’s positive cash flow.

From to , the average spot exchange rates of USD and related

currencies, such as Saudi Arabian Riyals (SAR), to SEK declined by

approximately percent. Other currencies where Ericsson has material

exposures, such as EUR, GBP and JPY, did not have similar significant

exchange rate movements. The decline in average hedged rates year over

year was lower for USD and related currencies, approximately percent,

and insignificant for other currencies. The effect on operating income of

changed hedged rates year over year was SEK –. billion, and on income

after financial items SEK –. billion. If the change in average spot rates

had been used, the effect on operating income would have been SEK –.

billion.

Exchange rate differences in operating income for were SEK –.

billion, net, with SEK –. billion of negative differences from spot rates

almost fully offset by positive effects of hedging.

Income after financial items was SEK –. (–.) billion. Adjusted for

items affecting comparability, the full year income after financial items

was positive by SEK . (–.) billion despite SEK billion of lower

sales, which is a confirmation of the impact of cost reduction measures

taken.

Taxes in the period were positive SEK . (.) billion. The low

effective tax rate of () percent is a result of the write-down of

deferred tax assets in a couple of jurisdictions and other provisions and

write-downs of investments that are not tax deductible.

Net income was SEK –. (–.) billion and diluted earnings per

share SEK –. (–.). Diluted earnings per share according to US GAAP

were SEK –. (–.).

Balance sheet, cash f low, l iquidity and capital resources

The capital usage and cash position improved substantially during .

Total assets were reduced by SEK billion from SEK billion to

billion. Excluding increased cash of SEK billion, the reduction was SEK

billion, of which the largest items were customer financing, fixed assets plus

trade- and other receivables.

Customer financing credits were substantially reduced through sales

of credits.

Long-term debt and a convertible bond were repaid with SEK .

billion. Accounts payable and other operating liabilities were reduced by

SEK billion. While working capital is sufficient for operations, it is still

higher than needed for truly efficient operations and efforts to improve

this continue.

Due to reassessment of the nature of leases according to the present

interpretation of Swedish GAAP/IFRS, financial leases of SEK . billion

were reflected in the balance sheet as assets and interest bearing

liabilities.

Net cash developed favorably, with the excess of cash over debt

increasing from SEK billion to SEK billion. Due to the net loss and

cumulative translation effects, equity declined from SEK . billion to

SEK . billion, and the equity ratio declined to . (.) percent.

Cash flow before financing activities was positive by SEK . billion,

significantly above our target. The major drivers were the improved

income, reduced customer financing and reduced other operating assets.

Swedish pension liabilities of SEK . billion were settled through

payment to Alecta, a pension administration company.

29


The investment in Sony Ericsson was increased by EUR million or

SEK . billion. Capital expenditures and proceeds from divested assets

were almost equal.

Reduced debt and repaid convertible bonds were the major items in

the SEK . billion of negative cash flow from financing. The payment

readiness at year end was SEK . billion or percent of sales. The cash

position has improved since the rights issue, and no part of the stock

issue proceeds has been used for operational purposes, only for

reduction of debt.

We also refinanced debt of EUR . billion, or SEK . billion,

extending the maturity from to with possibility to call after

four years. A new USD . billion committed credit facility valid until

was arranged, which will become available as an existing USD .

billion facility expires in . Thereby the financial flexibility and

maturity profile was significantly improved. Currently and in the near

term, Ericsson expects that its current cash position will satisfy short-

term liquidity requirements.

Ericsson’s credit ratings are still below investment grade. The rating

was lowered by S&P in the first quarter to BB. We expect that our

subsequent improvements in income, cash position and financing will

lead to improved ratings and thereby also lower interest costs on bonds

with interest rates linked to our rating.

Off Balance Sheet items

Customer financing credits of SEK . (.) billion issued by third parties

and guaranteed by Ericsson were outstanding as per December . See

Notes to the Financial Statements – Note , Financial Instruments, and

Note , Reconciliation to Accounting Principles Generally Accepted in

the United States.

Contractual obl igations

Payment due by period< 1 1–3 3–5 >5

Total year years years years

Long-term debt 34.3 7.3 16.0 3.2 7.8Capital lease obligations 2.7 0.2 0.4 0.3 1.8Operating leases 14.5 2.7 3.9 3.0 4.9Other long-term liabilities 1.1 – 0.2 0.6 0.3Credit commitments for customer financing 6.1 1.7 4.4 – –

Total 58.7 11.9 24.9 7.1 14.8

The Company has purchase obligations, in particular in relation to

outsourced manufacturing and IS/IT operations, divested R&D

operations and for components for own manufacturing. Subcontracted

manufacturing corresponds to demands related to Ericsson’s order

backlog with a duration of five to six months.

FINANCIAL RISK MANAGEMENT

(A more detailed description of financial risk management and financial

instruments used is included in Note to the Financial Statements.)

Ericsson’s financial risk management is governed by a policy approved

by the Board. The Finance Committee of the Board is responsible for

approving certain matters regarding investments, loans, guarantees and

customer financing commitments and is continuously monitoring the

exposure to financial risks. Financial risks are defined as market risk,

country risk, cash flow, funding and liquidity risk. Market risk is further

divided into three types of risk: foreign exchange risk, interest rate risk,

and market price risk in own shares and other listed equity instruments.

The Board has established risk limits for exposures to foreign

exchange and interest rate risks. The market risk mandate of SEK

million is based on a five percent adverse change in foreign exchange

rates of the total position and a one percentage point change in interest

rates. This is complemented by a Value at Risk calculation, given a

confidence level of percent and a -day horizon.

Ericsson has a treasury function with the principal role to ensure that

sufficient financing is in place through loans and committed credit

facilities, to actively manage the group’s liquidity as well as financial

assets and liabilities, and to manage and control financial exposures in a

manner consistent with underlying business risks and financial policies.

Cash management and handling of hedging activities are centralized to

the consolidated subsidiary Ericsson Treasury Services Aktiebolag in

Stockholm.

Ericsson also has a customer finance function with the main objective

to find suitable third-party financing solutions for customers and to

minimize recourse to Ericsson. To the extent customer loans are not

provided directly by banks, the consolidated subsidiary Ericsson Credit

AB provides or guarantees vendor credits. The customer finance function

monitors the exposure from outstanding vendor credits and credit

commitments.

Our business operations and the resulting financial instruments and

future commitments give rise to exposures to financial risks. Primary

financial instruments are structured and designated to hedge the

exposures to the extent possible. As a complement to the primary

instruments also derivative instruments are used for hedging, mainly

currency swaps and interest rate swaps. Except for the above described

risk mandate, risks associated with the use of financial instruments

correspond to actual and forecasted foreign exchange and interest rate

commitments.

Foreign exchange r isk

With a very large share of sales in currencies other than SEK, Ericsson has

a net exposure of revenue in a number of currencies, mainly USD. The

duration of this exposure is also considerable, as a result of many

contracts with long lead-times between order and delivery. Changes in

foreign exchange rates may have a large impact on our results, and the

policy is to reduce this effect to the extent possible through a variety of

hedging activities.

The transaction exposure is concentrated to Sweden, and all

forecasted sales and purchases with a high degree of probability are

hedged – months out.

30


Lending to customers and borrowings are hedged through offsetting

of balances, and residual net borrowing exposure is hedged through

offsetting cash positions or derivative instruments.

Ericsson has many subsidiaries operating outside Sweden. The values

of such foreign investments are exposed to exchange rate fluctuations,

which affect the consolidated balance sheet and income statement when

translated to SEK. Translation exposure in foreign subsidiaries is hedged

according to the following policy approved by the Board:

• Monetary net in companies translated using the temporal method, i.e.

where translation effects in investments affect the income statement,

is hedged to percent.

• Equity in companies translated using the current method, i.e. where

translation effects are reported directly in stockholders’ equity in the

balance sheet, is hedged up to percent in selected companies.

Other effects of translation of financial statements in foreign currencies

are not hedged.

Interest rate r isk

Ericsson is exposed to interest rate risk through market value

fluctuations of certain balance sheet items and through changes in

interest expenses and revenues. In managing our interest rate exposure

we use derivative instruments, such as forward rate agreements, interest

rate swaps and cross currency swaps.

Having large gross interest revenues and costs, the objective is to

avoid risk in the form of a mismatch between fixed and floating interest

bearing balance sheet items. To achieve this, we strive to reach a position

where all interest rates are floating.

Risk related to our share price

We are exposed to the development of Ericsson’s own share price

through stock option and stock purchase plans for employees. The

obligation to deliver shares under these plans is covered by holding

Ericsson Class B shares in treasury and warrants for issuance of new

Ericsson Class B shares. An increase in the share price will result in social

security charges, which represents a risk to both income and cash flow.

The income statement exposure in some of the option programs is

hedged through the purchase of call options. The cash flow exposure is

fully hedged through the holding of Ericsson Class B shares in treasury

and through the purchase of call options on Ericsson Class B shares.

Risk related to market prices of l isted equity instruments

Through investments in equity instruments in listed companies, we are

exposed to changes in the market values of such instruments. Such

instruments, however, constitute a very limited part of our assets and are

therefore not hedged.

Credit risk

Credit risk is divided into three categories: credit risk in trade

receivables, customer finance risk and financial credit risk.

Credit r isk in trade receivables

Extended payment terms for trade credits are to be approved by the CFO.

Provisions for expected losses are regularly reviewed. Credit losses have

historically been low, however, as a result of the customer structure, with

a major share of sales to large and successful operators.

Customer f inance r isk

The Finance Committee of the Board shall approve all commitments in

excess of USD million (from USD million) to extend financing

support to customers. In most of our customer finance arrangements,

Ericsson maintains security interests, normally in the form of pledges of

equipment, certain of the borrowers’ assets and/or pledges of shares.

Financial credit r isk

Financial instruments carry an element of risk in that counterparts may be

unable to fulfill their obligations. These risks are mitigated by investing excess

liquidity primarily in commercial papers, treasury bills and floating rate notes

with short-term ratings of at least A/P and long-term ratings of at least A/A

and in liquidity funds holding a rating of at least single A.

Country risk

Tax, currency and other legal and economic restrictions in certain countries

can affect our ability to transfer funds within the group and to provide

funding to certain subsidiaries. However, the impact of such restrictions is

currently very limited.

Funding and liquidity risk

We maintain sufficient liquidity through centralized cash management,

with investments in highly liquid fixed income securities, and by having

sufficient committed and uncommitted credit lines in place for potential

funding needs.

Ericsson’s funding policy stipulates that the greater part of borrowings

should be long-term.

CRITICAL ACCOUNTING POLICIES

(For more detailed descriptions, please see Notes to the Financial

Statements – Note , Accounting Policies and, for reconciliation to US

GAAP, Note to the Financial Statements.)

The preparation of financial statements and the application of

accounting policies in many cases involve management’s judgment or

the use of estimates based on past experience and assumptions deemed

to be reasonable and prudent. Actual results may differ from these

estimates under different assumptions or conditions. We have identified

below the accounting policies that that might have the most significant

impact on our reported results and financial position.

Revenue recognition

A substantial share of Ericsson’s sales is construction-type contracts to

supply network systems configured according to customer specifications.

Managerial judgment is applied regarding contractual performance and

estimation of total contract costs, degree of completion, conformance

with acceptance criteria and collectibility of receivables to define timing

and amounts of revenue to be recognized. Due to the large number of

sales contracts in process simultaneously, the overall impact on a

consolidated level is limited.

31


Valuation of receivables and exposures

in customer financing

Ericsson continuously monitors the financial stability of the customers

and the environment in which they operate and apply judgment

regarding the realization of these receivables and guarantees. Total

allowances for doubtful accounts are SEK . billion or percent of total

receivables. The major part of the customer base has good

creditworthness, and the impact of estimates regarding individual

receivables is therefor limited in the consolidated accounts. Customer

financing credits have higher risks, as such customers normally have less

strong balance sheets and liquidity. Consequently, the total risk

provisions are higher than for trade receivables. For outstanding

customer financing credits and for third party credits under our

guarantee we regularly assess the credit risk and make necessary

provisions.

Inventory valuation and commitments related to outsourcing

arrangements

Inventories are valued at the lowest of cost or market value, taking into

account also risks of obsolescence. This valuation involves making

estimates of obtainable market value, future customer demand and

changes in technology and customer acceptance of new products.

More than half of our production is outsourced to contract

manufacturing companies. In addition to valuation allowances regarding

own inventories, we regularly assess the need for provisions for supplier

compensation due to failure to reach minimum committed purchase

volumes.

Customer warranties

Provision amounts for product warranties are based on assumptions,

involving historic failure rates as well as estimates regarding failure rates

for new products, and also estimates on costs to remedy various types of

faults.

Deferred taxes

Deferred tax assets are recognized for temporary differences between

reported and taxable income and for unutilized tax loss carry-forwards.

This involves assumptions regarding the deductibility of costs not yet

subject to taxation and regarding sufficient future taxable income to

enable utilization of unused tax losses in different tax jurisdictions. The

largest amounts of tax loss carry-forwards are in Sweden, with an

indefinite period of utilization.

New Accounting Principles

Swedish GAAP 2004

Pensions

Starting , Ericsson will apply a new mandatory IAS-based Swedish

accounting standard for pensions. According to this standard, future

salary increases will be considered in calculating the pension liability,

whereas until only actual salaries were considered. This change will

increase the current pension provisions by an estimated SEK . billion.

The effect of this accounting change will be reported as a one-time

charge to equity of SEK . billion, net of taxes. Pension liabilities are also

subject to several other assumptions than future salaries, such as

inflation rate, return on plan assets, discount rate, employee turnover

and mortality. Different assumptions may change the liability

significantly and Ericsson makes those assumptions in consultation with

actuaries and applies a consistent set of assumptions to avoid volatility.

US GAAP 2004

FIN46R, Consol idation of Variable Interest Entit ies

In , all Variable Interest Entities, where Ericsson is the primary

beneficiary, will be consolidated. At present, certain real estate entities

have been identified, which will only have a limited impact on the

balance sheet.

Swedish GAAP 2005

International Financial Report ing Standards ( IFRS)

From , Ericsson will be required to report according to IFRS. An

internal project is underway to identify differences to current GAAP and

what changes will be necessary. The company is in the process of

evaluating the impact. It is expected that IAS regarding financial

instruments and new standards regarding share-based compensation and

business combinations will be the standards with the largest impact.

LEGAL AND TAX PROCEEDINGS

Ericsson and InterDigital Communications Corporation (InterDigital),

along with its subsidiary InterDigital Technology Corporation (ITC),

settled the companies’ long-standing patent infringement litigation.

Under the settlement agreement, the companies entered into a

license agreement covering all of ITC’s patents for GSM, TDMA (D-AMPS),

GPRS, EDGE and PDC. In exchange, Ericsson will make an annual payment

of a limited fixed amount through 2006 for sales of covered

infrastructure equipment.

At the same time, Sony Ericsson and ITC have entered into a similar

license agreement concerning handsets, under which Sony Ericsson will

pay royalties to ITC through .

We continue to be engaged in litigation proceedings with Harris

Corporation in the United States regarding alleged infringement of their

patents. We have contested the claim.

The industry, including Ericsson, is named defendants in a number of

class actions in the United States where plaintiffs allege that adverse

health effects could be associated with the use of handsets. Together

with the majority of the industry, Ericsson has been named defendant in

six such lawsuits. The court has dismissed five of these cases. Plaintiffs

have appealed the decision.

During –, Swedish fiscal authorities disallowed, for corporate

income tax purposes, the Parent Company and the subsidiaries Ericsson

Telecom AB and Ericsson Radio Systems AB (renamed as Ericsson AB)

deductions for commission payments via external service companies to

agents in certain countries. The increase in corporate income taxes for all

companies amounts to SEK million, of which SEK million were paid

by the end of . All decisions have been or will be appealed.

ORGANIZATION AND EMPLOYEES

Organization and Management

On April , Carl-Henric Svanberg, former Chief Executive Officer (CEO)

of Assa Abloy, was appointed President and CEO of Ericsson, succeeding

Kurt Hellström, who remained employed until the end of , when

he retired.

Chief Operating Officer Per-Arne Sandström was appointed Deputy

CEO.

Karl-Henrik Sundström, head of business unit Global Services, was

appointed Chief Financial Officer (CFO), succeeding Sten Fornell, who

remained as advisor to the management for the balance of .

32


An Executive Team was established, consisting of the CEO, the Deputy

CEO and the CFO.

The organization was changed during , effective January , ,

to reflect that the group is now smaller than before and to promote

more efficient operations with clear areas of responsibility and with a

simpler structure than before and with fewer organizational layers.

The changes include:

• The market area organization is eliminated. The market units were

reduced from to and now report to the Executive Team.

• Within the Systems segment, the business unit Mobile Systems was

split into two: Core Systems, headed by Björn Olsson, and Access,

headed by Kurt Jofs. The Systems segment’s other three business units

remained unchanged: CDMA Systems, Transmission and Transport

Networks and Global Services.

• A new group function “Sales and Marketing” was established. Bert

Nordberg, previously head of the business unit Mobile Systems, was

appointed to head this function.

As a result of restructuring and outsourcing activities, the total

headcount declined by percent during from , to ,.

Please see “Directors, Senior Management and Auditors” for more

information about employees and management.

Employee Compensation

The Annual General Meeting in approved an employee stock

purchase plan based on million Class B shares, including shares

designated for social security payments. Employees may during

months purchase shares for up to . percent of their salary up to SEK

, per -month period. If the shares are kept for three years and

the employment is continued, the employee will be given matching

shares at a ration of :.

For the President and CEO and the Group Management, the

maximum level of variable salary is reduced from percent to

percent of the base salary from . This change is compensated by an

increase of percent of the fixed salary. The current stock purchase

program may be complemented with acceleration features, so that

multiple shares may be granted for each share purchased, depending on

if performance targets are met, subjected to approval by the Annual

General Meeting in .

See to Note in Notes to the Financial Statements for more

information about employee compensation.

CORPORATE SOCIAL RESPONSIBILITY

We believe companies should act in a responsible way, maintaining high

standards in corporate governance, and in employee and supplier

conduct. Companies should also have a sustainable view in dealing with

the environment and humanitarian aid. Ericsson has accepted the UN

Global Compact’s nine principles for human rights. We see these

principles as a prerequisite for sound, long-term business. These are also

guiding principles in our work and inspire us to find new ways to deploy

our equipment and services in developing countries.

Sustainability and Environment

We are committed to continuous improvement of the environmental

performance of our products, services and operations.

In we:

• Applied the results from our unique G life cycle to our environmental

goals, with more emphasis given to decreasing mass and energy flows

without jeopardizing quality.

• Took action to further reduce the energy consumption of our

products while in use.

• Continued to phase out banned and restricted materials, including

lead in solder and brominated flame retardant.

• Consolidated a worldwide Ecology Management recycling scheme

through which we take back and recycle our customers’ phased-out

equipment.

In we will evaluate the impact of the EU directive on prevention of

waste of electrical and electronic equipment (WEEE).

Code of Conduct

Ericsson’s Code of Conduct regarding basic working conditions and

environment protects the rights of people working with our products

and services, including those working for our suppliers. We will

discontinue, to the extent justifiable, cooperation with any party that

persists in non-compliance. The Code of Conduct includes directives

on:

• Workers’ rights, including human rights and discrimination, wages

and working hours.

• Safety, including workplace conditions.

• Environment, with suppliers required to comply with environmental

laws and our environmental requirements.

• Child labor, which we base on the child labor code in the UN

Convention on the Rights of the Child, article ..

• Monitoring, with all suppliers obliged to inform us about their

operations.

Ericsson’s internal rules for ethical behavior and other important rules

for all directors, officers and employees have long been established via

group policies and directives. A Code of Business Ethics and Conduct

for all employees, directors and officers that essentially summarizes the

most important of these rules will be implemented during .

Please refer to Ericsson’s investor website for further information:

www.ericsson.com

Ericsson Response program

Ericsson Response is a global initiative aimed at responding to human

suffering caused by disasters. Ericsson Response assists disaster relief

operations by providing specialist volunteers and communications

equipment. Key achievements in were:

• Relief work in Bam, Iran

Set up of a complete GSM communications system, providing

emergency communication to aid relief work in Bam, Iran, following

the major earthquake on December . The network was up and

running within hours after deployment

• UN World Food Programme

Ericsson Response signed an agreement with the UN World Food

Programme for the use of volunteers in the UN’s humanitarian

operations worldwide

33


• Humanitarian assistance to Liberia

Due to civil unrest in Liberia, hundreds of thousands of people fled

their homes and were without access to adequate food supplies. Two

volunteers helped the UN World Food Programme to re-establish IT

and telecommunications systems in their looted offices in and around

Monrovia.

• Humanitarian assistance to Iraq

Ericsson Response worked with the UN World Food Programme at the

Fast ICT Response team (FITTEST) base in Dubai, helping to prepare

for the humanitarian operation in Iraq, and

• Relief operations in Algeria.

Assisted the Swedish Search and Rescue team and the International

Federation of Red Cross and Red Crescent Societies (IFRC) by

strenghtening the network to support relief operations outside of

Alger after the severe earthquake in May.

CORPORATE GOVERNANCE

Board changes 2003

At the Annual General Meeting on March , , Arne Mårtensson

succeeded Tom Hedelius as member of the Board and as Deputy

Chairman.

In recent years, several committees have been established to

strengthen corporate governance within Ericsson, including:

• Audit Committee, which is appointed by the Board among its

members and oversees financial statements, audit processes and audit

fees

• Finance Committee, which is appointed by the Board among its

members and oversees major financial transactions and our exposure

to financial risk

• Remuneration Committee, which is appointed by the Board among

its members and oversees salary levels, retirement compensation and

incentive plans for employees

• Nomination Committee, consisting of shareholders, which is

appointed by the shareholders at the Annual General Meeting and is

responsible for nominating Board Directors and proposing Directors’

fees, and

• Disclosure Committee, appointed by the CEO and CFO to assist them

in relation to the requirements on the company’s disclosure controls

and procedures and internal controls.

The Board work during 2003

The work of the Board is subject to an established work procedure that

defines the distribution of work between the Board and its three

committees (Audit, Finance and Remuneration) and between the Board

and the President. The work procedure is evaluated each year and

revised if deemed appropriate. The Chairman has had individual

discussions with each member regarding the work procedure and the

evaluation of the Board work. The other members of the Board evaluate

the work of the Chairman each year. The Board also evaluates the work

of the President annually.

The main tasks of the committees are to work on behalf of the Board

within their respective areas of responibility. In certain matters, the

Board has authorized the committees to resolve issues, i.a. the Finance

Committee has the authority to resolve on customer financing and

financing of the Group companies. Although a committee may have the

authority to resolve a matter, they often refer it to the Board for

resolution.

More information on Board and committee activities can be found in

“Directors, Senior Management and Auditors – Board Procedures and

Committees”.

Through the work in the committees, various matters have been

possible to handle much more in-depth, with better analysis and

preparation for resolution by the Board. Each committee includes Board

members that are employee representatives, which has been beneficial to

the committee work. Before each Board meeting, the committees

submit reports to the Board on the issues handled, resolved or referred

to the Board. Each committee also prepares an annual report to the

Board.

The Board adapted its work procedure in line with development in

Sweden and the United States regarding reporting, disclosure and other

requirements on listed companies from Stockholmsbörsen, the US

Securities and Exchange Commission, NASDAQ and changes in

legislation, such as the Sarbanes-Oxley Act in the United States. The

Board has had meetings during . The Board also received training

sessions regarding company matters and made a number of site visits to

enhance the members’ knowledge about Ericsson.

The company auditors have presented to the Board their observations

from the audit of the annual report as well as their reviews of interim

reports and the evaluation of our internal controls.

The Audit Committee had meetings in and reviewed the

financial reporting, the scope and execution of audits performed, the

independence of the external auditors, the internal audit function and

audit fees. The committee together with the auditors reviewed the

Auditors’ report prior to publishing of each interim report. The

committee implemented pre-approval procedures for non-audit services

by our auditors. The committee devoted significant time to review

matters and observations arising from audits performed. The Audit

Committee also reviewed and initiated a strengthening of our internal

disclosure controls and procedures to improve them and to ensure

adequate disclosure. Other matters reviewed by the committee include

the handling of vacant premises, pension liabilities, provisions, fraud

risk assessments, capitalization of development expenses and deferred

tax assets. Procedures for confidential submission by employees of

concerns regarding questionable accounting or auditing matters are

under preparation and will be implemented in . The committee

established a procedure for the provisioning of audit services as a basis

for a proposal for election of auditors by the Annual General Meeting

and resolved to propose to the AGM that the fees to the auditors be based

on work performed (i.e. on account).

The Finance Committee primarily resolved issues regarding

restructuring of customer credits and trade receivables, guarantees,

credit facility agreements, refinancing of Ericsson’s existing credit

commitments, the financing strategy (including strategies for risk

management, insurance and customer financing) and pension liabilities.

The committee prepared for resolution by the Board a proposal to

transfer certain Swedish pension liabilities to Alecta, to provide

additional security to the insurance company for Swedish white-collar

pension liabilities (FPG) for such pension liabilities, as well as capital

contributions to companies inside and outside the Ericsson Group,

including the contribution of EUR million to Sony Ericsson. The

Finance Committee also monitored the financial risk exposure and risk

limits and reviewed the reporting to the committee in this respect. The

committee had meetings in .

34


The Remuneration Committee reviewed and prepared for resolution

by the Board, with the support of major Swedish shareholders, a

proposal for a continued stock purchase program from , which was

resolved by the AGM in . The committee also prepared an extended

employee incentive stock purchase plan, including additional matching

for , key contributors and acceleration possibilities for matching of

multiple shares for critical employees including senior management,

depending on meeting performance targets. The committee approved

certain remuneration packages for newly appointed members to the new

Management Team. The committee also reviewed proposals for salaries

and incentive pay for , including the general compensation package

for the Management Team. The committee had meetings in .

A Code of Ethics for the CEO and senior financial officers was

implemented in . Company policies have been updated and central

policies regarding ethical and conduct issues have been summarized in a

Code of Business Ethics and Conduct.

An information policy in accordance with the requirements of

Stockholmsbörsen was adopted. Management established a Disclosure

Committee to ensure accurate, complete and timely disclosure and

related issues.

See Directors, Senior Managers and Auditors for more information.

POST-CLOSING EVENTS

In the beginning of , Ericsson became involved in a patent

litigation in Europe related to ATM technology. We have contested the

claim.

PARENT COMPANY

The Parent Company business consists mainly of corporate management

and holding company functions. It also includes activities performed on a

commission basis by Ericsson Treasury Services AB and Ericsson Credit AB

regarding internal banking and customer credit management. The Parent

Company is the owner of all intellectual property rights and manages the

patent portfolio, including patent applications, licensing and cross-

licensing of patents and defending of patents in litigations.

The Parent Company has branch- and representative offices in ()

countries.

Net sales for the year amounted to SEK . (.) billion and income

after financial items excluding restructuring costs, was SEK . (.)

billion.

The financial statements for have been revised due to changes in

accounting principles. These changes have not affected the consolidated

financial statements. Major changes in the Parent Company’s financial

position for the year include decreased current and long-term

commercial and financial receivables from subsidiaries of SEK . billion

and increased cash and short-term cash investments of SEK . billion.

Short- and long-term internal borrowings decreased by SEK . billion.

At year-end, cash and short-term investments amounted to SEK .

(.) billion.

In the second quarter, as decided at the Annual General Meeting, a

stock issue and subsequent stock repurchase related to the

employee Stock Purchase Plan was carried out. million of Ericsson

Class C shares were issued and later repurchased as treasury stock. These

shares have been converted to Ericsson Class B shares. The stock issue

increased capital stock in restricted stockholders’ equity by SEK

million and the repurchase reduced non-restricted equity by SEK

million.

In accordance with the conditions of the Stock Purchase Plan and

Option Plans for Ericsson employees, ,, shares from treasury

stock were sold or distributed to employees during the year. The holding

of treasury stock at December , , was ,, Class B shares.

PROPOSED DISPOSITION OF EARNINGS

As of December , , non-restricted equity in the Parent Company

amounted to SEK ,,,.

The Board of Directors proposes that no dividend is paid and the

whole amount is retained within the business.

35

Stockholm February 6, 2004Telefonaktiebolaget LM Ericsson (publ)

Org. no. 556016-0680

Arne Mårtensson Michael Treschow Marcus Wallenberg

Deputy chairman Chairman Deputy chairman

Peter Sutherland Peter L. Bonfield Eckhard Pfeiffer

Sverker Martin-Löf Lena Torell Per Lindh

Åke Svenmarck Carl-Henric Svanberg Jan Hedlund

President and CEO

E R I C S S O N S U M M A R Y A N N U A L R E P O R T 2 0 0 3 B O A R D O F D I R E C T O R S & C O R P O R AT E M A N A G E M E N T

36

BOARD OF DIRECTORS & CORPORATE MANAGEMENT

Michael Treschow(Age 60) Chairman of the Board ofDirectors 2002. Chairmanof the Finance and member of theRemuneration Committee. Shares held: LME B 770,000

Arne Mårtensson(Age 52) Director 2003. DeputyChairman of the Bord of Directors andmember of the Finance Committee. Shares held: LME B 13,400

Carl-Henric SvanbergPresident and Chief Executive Officer.

Per-Arne SandströmFirst Executive Vice President and deputy Chief Executive Officer.Shares held: LME B 105,830

Karl-Henrik SundströmExecutive Vice President and Chief Financial Officer.Shares held: LME B 2,846

Carl Olof Blomqvist Senior Vice President, General Counsel and head of GroupFunction Legal Affairs.Shares held: LME A 6,080; LME B 10,488

Håkan ErikssonSenior Vice President and ChiefTechnical Officer and General Manager,Research & Development.

Mats GranrydSenior Vice President and GeneralManager, Business Unit MobileSystems CDMA.Shares held: LME B 6,000

Marita HellbergSenior Vice President and head ofGroup Function Human Resourcesand Organization.Shares held: LME B 22,253

Kurt JofsSenior Vice President and GeneralManager, Business Unit Access.Shares held: LME B 200,000

Torbjörn NilssonSenior Vice President and head ofGroup Function Strategy and ProductManagement.Shares held: LME B 49,399

Bert NordbergSenior Vice President and head ofGroup Function Sales and Marketing.Shares held: LME B 4,047

Björn OlssonSenior Vice President and GeneralManager, Business Unit SystemsShares held: LME B 8,386

Henry SténsonSenior Vice President and head ofGroup Function CommunicationsShares held: LME B 10,000

Per TjernbergSenior Vice President and head ofGroup Function IS/IT and Sourcing.Shares held: LME B 22,000

Hans VestbergSenior Vice President and GeneralManager, Business Unit Global ServicesShares held: LME B 8,009

Carl-Henric Svanberg is the only Director whoholds a management position at Ericsson. NoDirector has been elected pursuant to anarrangement or understanding with any majorshareholder, customer, supplier or other person.No Director has a family relationship with anyother Director or executive officer.

For more information on the Board of Directorsand Corporate Management Team, see theEricsson web page, ericsson.com/investors(Annual Report 2003). (Information on our website does not form part of this document).

Board of Directors

Our Articles of Association stipulate that the Board of Directors shall consist of not less than five andnot more than twelve Directors with not more than six deputy Directors, elected each year by theshareholders at our annual general meeting. The term of office for a Director is one year, but a Directormay serve any number of consecutive terms.

In addition, under Swedish law, employees have the right to appoint three Directors (and their deputies).Our Directors (as of December 31, 2003) are as below:

Corporate Management

Carl-Henric Svanberg(Age 52) Director 2003. President andCEO of Telefonaktiebolaget LMEricsson. Shares held: LME B 15,572,231

Lena Torell(Age 57) Director 2002. Member ofthe Remuneration Committee. Shares held: LME B 50,000

Marcus Wallenberg(Age 47) Director 1996. DeputyChairman of the Board of Directorsand member of the FinanceCommittee. Shares held: LME B 704,000

Sir Peter L Bonfield, CBE(Age 59) Director 2002.Member of the Audit Committee.

Jan Hedlund(Age 57) Director 1994. Member ofthe Audit Committee. Employee representative. Shares held: LME B 875

Per Lindh(Age 46) Director 1995. Member ofthe Remuneration Committee.Employee representative. Shares held: LME B 70

Sverker Martin-Löf(Age 60) Director 1993. Chairmanof the Audit Committee. Shares held: LME B 52,000

Åke Svenmarck(Age 61) Director 2000. Member ofthe Finance Committee. Employeerepresentative. Shares held: LME B 503

Peter Sutherland(Age 57) Director 1996. Chairman ofthe Remuneration Committee.

Eckhard Pfeiffer(Age 62) Director 2002. Member ofthe Audit Committee. Shares held: LME B 3,040

Monica Bergström(Age 43) Deputy Director. Employee representative.Shares held: LME B 597

Göran Engström(Age 56) Deputy Director. Employee representative.Shares held: LME B 11,086

Arne Löfving(Age 51) Deputy Director. Employee representative.Shares held: LME B 5,102

E R I C S S O N S U M M A R Y A N N U A L R E P O R T 2 0 0 3 F I N A N C I A L S TAT E M E N T S

37

CONSOLIDATED INCOME STATEMENT

Years ended December 31, SEK million 2003 2002 1) 20011)

Net sales 117,738 145,773 231,839Cost of sales –78,901 –104,224 –173,900Gross margin 38,837 41,549 57,939

Research and development and other technical expenses –27,136 –30,510 –46,640Selling expenses –15,115 –21,896 –32,352Administrative expenses –8,762 –9,995 –14,010Total operating expenses –51,013 –62,401 –93,002

Share in earnings of joint ventures and associated companies –604 –1,220 –715Other operating revenues and costs 1,541 773 8,398Operating income –11,239 –21,299 –27,380

Financial income 3,995 4,253 4,815Financial expenses –4,859 –5,789 –6,589Income after financial items –12,103 –22,835 –29,154

Income taxes for the year 1,460 4,165 8,813Minority interest –201 –343 –923

Net income –10,844 –19,013 –21,264

Average number of shares, basic (million) 15,823 12,573 10,950Average number of shares, diluted (million) 15,841 12,684 11,072Earnings per share, basic (SEK) –0.69 –1.51 –1.94Earnings per share, diluted (SEK) –0.69 –1.51 –1.94

Key measurements, excluding items affecting comparabilityAdjusted gross margin 43,627 47,138 66,284

– as percentage of net sales 37.1% 32.3% 28.6%Adjusted operating expenses –41,621 –59,309 –86,347Adjusted operating margin 3.1% –8.6% –7.8%Adjusted income after financial items 2,789 –14,031 –19,954

1) Restated for changed accounting principles.

38


CONSOLIDATED BALANCE SHEET

December 31, SEK million 2003 2002 2)

Assets

Fixed assetsIntangible assets

Capitalized development expenses 4,784 3,200Goodwill 5,739 8,603Other intangible assets 687 806

Tangible assets 6,505 9,964Financial assets

Equity in joint ventures and associated companies 2,970 1,835Other investments 433 2,243Long-term customer financing 3,027 12,283Deferred tax assets 27,130 26,047Other long-term receivables 1,342 2,132

52,617 67,113

Current assetsInventories 10,965 13,419Receivables

Accounts receivable – trade 31,886 37,384Short-term customer financing 979 1,680Other receivables 12,718 23,303

Short-term cash investments 56,622 48,252Cash and bank 16,585 17,962

129,755 142,000

Total assets 182,372 209,113

Stockholders’ equity, provisions and liabilities

Stockholders’ equityCapital stock 16,132 15,974

Reserves not available for distribution 40,298 39,950

Restricted equity 56,430 55,924Retained earnings 14,895 36,696

Net income –10,844 –19,013

Non-restricted equity 4,051 17,683

60,481 73,607

Minority interest in consolidated subsidiaries 2,299 2,469

ProvisionsPensions 8,005 10,997Other provisions 28,063 21,357

36,068 32,354

Long-term liabilitiesNotes and bond loans 26,312 33,074Liabilities to financial institutions 689 3,043Other long-term liabilities 2,771 949

29,772 37,066

Current liabilitiesCurrent maturities of long-term debt 7,262 11,083Current liabilities to financial institutions 2,247 3,238Advances from customers 3,297 2,672Accounts payable – trade 8,895 12,469Income tax liabilities 1,943 619Other current liabilities 30,108 33,536

53,752 63,617

Total stockholders’ equity, provisions and liabilities1) 182,372 209,113

Assets pledged as collateral 8,023 2,800Contingent liabilities 2,691 3,116

1) Of which total interest-bearing provisions and liabilities 46,209 (61,463), of which long-term 36,700 (47,142). 2) Restated for change in accounting principle in Sweden 2003 regarding financial instruments (RR27), and with all deferred tax assets reported as long-term.


39

CONSOLIDATED STATEMENT OF CASH FLOWS

Years ended December 31, SEK million 2003 2002 2001 1)

OPERATIONSNet income –10,844 –19,013 –21,264

Adjustments to reconcile net income to cashDepreciation and amortization 8,395 6,537 7,828Taxes –2,352 –9,171 –16,983Write-downs and capital gains(–)/losses on sale of fixed assets, net 924 721 –6,126Other non-cash items –580 81 1,724

Changes in operating net assetsInventories 2,286 8,599 20,103Customer financing, short-term and long-term 7,999 –2,140 3,903Accounts receivable – trade 4,131 9,839 19,653Provisions and pensions 5,810 3,576 5,728Other operating assets and liabilities, net 7,098 –9,117 –13,148

Cash flow from operating activities 22,867 –10,088 1,418

INVESTMENTSInvestments in tangible assets –1,806 –2,738 –8,726Sales of tangible assets 1,510 2,977 10,155Acquisitions/sales of shares and other investments, net –818 2,703 5,393Capitalization of development expenses –2,359 –3,442 –Net change in capital contributed by minority 1 503 –83Other 60 2,981 –1,488

Cash flow from investing activities –3,412 2,984 5,251

Cash flow before financing activities 19,455 –7,104 6,669

FINANCINGChanges in current liabilities to financial institutions, net –854 –17,168 3,343Proceeds from issuance of other long-term debt 32 540 35,169Repayment of long-term debt –10,904 –6,072 –8,470Stock issue 158 28,940 155Sale/repurchase of own stock –150 2 –156Dividends paid –206 –645 –4,295

Cash flow from financing activities –11,924 5,597 25,746

Effect of exchange rate changes on cash –538 –1,203 738

Net change in cash and cash equivalents 6,993 –2,710 33,153

Cash and cash equivalents, beginning of period 66,214 68,924 35,771

Cash and cash equivalents, end of period 73,207 66,214 68,924

1) Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to RR1:00.

E R I C S S O N S U M M A R Y A N N U A L R E P O R T 2 0 0 3 S H A R E H O L D E R I N F O R M AT I O N

40

Stock exchange trading

Ericsson’s Class A and B shares are traded on the Stockholm Stock

Exchange (Stockholmsbörsen), and the Class B shares are also

traded on the London Stock Exchange.

The de-listing from the European exchanges that began in

continued in and on February we de-listed from Euronext

(Paris) and on April we also de-listed from the German

Exchanges (Düsseldorf, Frankfurt and Hamburg).

In the United States, the Class B shares are traded on NASDAQ in

the form of American Depositary Shares (ADS) evidenced by

American Depositary Receipts (ADR). Each ADS represents

Class B shares.

More than () billion shares were traded in , of which

about . () percent were traded on Stockholmsbörsen, about

. () percent on NASDAQ, and about . () percent on the

London Stock Exchange. Trading on other exchanges amounted to

less than () percent of the total share trade.

During , million shares were issued and repurchased as

treasury stock in connection with the Stock Purchase Plan .

Share price trend

During the total market value of our shares increased by

about percent (decreased by about percent in ) to

approximately SEK billion (SEK billion in ). The

Stockholmsbörsen OMX index increased by percent, the

NASDAQ telecom index increased by approximately percent and

the NASDAQ composite index increased by approximately

percent in . The Ericsson share increased by approximately

percent on NASDAQ (decreased by almost percent in ).

Share capital

As of December , , Ericsson’s share capital consisted of SEK

,,, (,,,) represented by ,,,

shares. The par value of each share is SEK .. As of December ,

the shares were divided into ,, Class A shares, each

carrying one vote, and ,,, Class B shares, each

carrying one-thousandth of a vote.

Shareholders

We believe that approximately () percent of our Class A and

B shares at year-end , were owned by Swedish or international

institutions. Shares held in Sweden were . () percent, .

(.) percent in the Unites States, . (.) percent in the United

Kingdom, . (.) percent in Luxembourg, . (.) percent in

Switzerland, . (.) percent in Germany, . (.) percent in

Belgium, . (.) percent in France, . (.) percent in Norway,

. (.) percent in Denmark and . (.) percent in other

countries.

OUR SHARE

Share trend, Stockholm Stock Exchange Share turnover (million shares)

50

100

150

1999 2000 2001 2002 2003

B shares SEKOMX index

3,000

4,000

5,000

6,000

7,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

London StockholmNasdaq

The Annual General Meeting will be held at the Globe Arena,

Globentorget, Stockholm, at p.m. on Tuesday, April , .

Shareholders intending to participate in the Annual General

Meeting must be entered as shareholders in the share register

maintained by VPC AB (Swedish Securities Register Center) not

later than Friday, March , .

A shareholder whose shares are registered in the name of a

trustee must be entered temporarily in the share register not later

than Friday, March , , in order to participate in

the Meeting. Please note that this procedure is also due for

shareholders who are trading via the Internet.

Notice of participation in the Annual General Meeting

In addition to the requirements listed above, shareholders shall

provide notice of attendance to:

Telefonaktiebolaget LM Ericsson

Group Function Legal Affairs

Box , SE- Stockholm, Sweden

Telephone: + between a.m. and p.m.,

Fax: + , or via the company’s web site

www.ericsson.com/investors no later than . p.m. Wednesday,

March , .

Proxy

In order to attend and vote as proxy on behalf of a shareholder at

the Meeting, a power of attorney must be presented to the

Company, preferably at the above address not later than Monday,

April , .

Dividend

The Board of Directors and the President have decided

to propose to the Annual General Meeting that no dividend

is paid for year .

Financial information from Ericsson

• Interim report January–March : April ,

• Interim report January–June : July ,

• Interim report January–September : October ,

• Full year report January–December :

January/February,

• Annual report and form -F for US Market :

March,

Annual reports and financial reports can be downloaded

or ordered on our web site: www.ericsson.com/investors

or ordered via e-mail or post.

For printed publications, contact:

Pressdata AB, P.O. Box , SE- Stockholm, Sweden

Phone + E-mail: [email protected].

In the US, Ericsson Transfer Agent Citibank:

Citibank Shareholder Services

Phone toll-free

E-mail: [email protected]

Ordering a hard copy of the Annual Report:

http://www.sccorp.com/annualreport/ericsson.htm

Call toll free:

Contact information:

Investor Relations for Europe, Middle East,

Africa and AsiaPacific: Telefonaktiebolaget LM Ericsson,

SE- Stockholm, Sweden, Telephone: +


Investor Relations for the Americas:

Ericsson Inc., Park Avenue, th floor, New York,

NY , USA, Telephone: +


SHAREHOLDER INFORMATION

Project managementEricsson Editorial Services / Ericsson Investor Relations

Design and production SAS, London

Content team Mats Thorén, Tim Rich

Photography Peter Hoelstad

Production coordinator Aralia, Stockholm

Reprographics Grafit, Stockholm

Printing Fagerblads, Västerås, Sweden

Where you can find out more:

Our website: www.ericsson.com

Our products: www.ericsson.com/products

Our services: www.ericsson.com/services

Our success: www.ericsson.com/successstories

Our sustainability: www.ericsson.com/sustainability

Uncertainties in the FutureSome of the information provided in this material is or may contain forward-looking information such as statements about expectations, assumptions about future marketconditions, projections or other characterizations of future events. The words “believe”, “expect”, “anticipate”, “intend”, “may”, “plan”, the negative of such terms, andsimilar expressions are intended to identify these statements. Although we believe that the expectations reflected in these and other forward-looking statements arereasonable, we can give no assurance that these expectations will prove to be correct and actual results may differ materially. We undertake no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or stock exchangeregulation. We advise you that Ericsson is subject to risks both specific to our industry and specific to our company that could cause the actual results to differ materiallyfrom those contained in our projections or forward-looking statements, including, among others, changing conditions in the telecommunications industry, politicaleconomic and regulatory developments in our markets, our management’s ability to develop and execute a successful strategy, various financial risks such as interest ratechanges and exchange rate changes, erosion of our market position, structure and financial strength of our customer base, our credit ratings, product development risks,supply constraints, and our ability to recruit and retain quality staff.

ISSN 1100-8962

Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm

Printed on paper that meets international environmental standards.(Munken Lynx, especially produced for Ericsson, is TCF, Totally Chlorine Free.)

EN/LZT 123 7867 © Telefonaktiebolaget LM Ericsson 2004

You can find Ericsson Annual Report 2003 online at www.ericsson.com/investors or you can order a copy from Pressdata AB, P.O. Box 3263, SE 103 65 Stockholm, Sweden. Phone +46 8 799 63 04, email: [email protected]. In the US, printed copies are available from Citibank Shareholder Services, phone toll-free 1 877 881 5969, email: [email protected].

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